The Lead Untangles: The case for a wealth tax
As the economy continues to tick along, slowly, there's calls for the Chancellor to give herself 'fiscal headroom' by taking more from the nations wealthiest few. How would that work?
At a glance facts
There are growing calls for a wealth tax as an alternative to Rachel Reeves’s current plans to balance the books through harsh cuts in welfare spending and elsewhere.
Campaigners at Tax Justice UK and Patriotic Millionaires are advocating a 2 per cent wealth tax on assets over £10 million to raise up to £24 billion a year, which they say would “ensure that those who have benefited enormously from structural economic changes over the last decade contribute fairly and create significant revenue to repair the country”.
As speculation mounts that Donald Trump’s tariffs may force Reeves to raise taxes even if she retains her cuts, polling suggests the British public wants the wealthy to pay more. But she would have to reverse on a pledge made in August 2023 not to increase top tax rates.
Twelve Labour MPs joined Green, independent and other parliamentarians last year in an open letter to Reeves backing a wealth tax. Other Labour MPs have since lent their support but the front bench has batted their calls away.
Opponents of a wealth tax say it’s a disincentive to entrepreneurialism and the rich will leave the country or find even more ways to hide their wealth.
Context
Public services have been cut to the bone - or even into it - government borrowing costs have risen and the UK tax burden is already high by historical standards. But the government is still facing a funding shortfall, wants to increase defence spending and is alienating not only its support base on the left with its planned welfare cuts but those closer to the centre too.
Since 1992 it’s been an electoral mantra that any party advocating higher income taxes will lose. Labour’s 1992 defeat was blamed on its tax policies and Tony Blair’s 1997 victory was attributed to his promise not to raise income tax. But adherence to this successful electoral principle ever since has stymied the debate about tax in this country.
The 2 per cent wealth tax sidesteps this barrier to some extent, as it focuses on the very wealthy, and support for it is growing.
A YouGov poll for Oxfam published on the eve of the Spring Statement found that 77 per cent of people across the UK would rather the government increase taxes on the very richest to improve public finances than see cuts to public spending.
Some 78 per cent support introducing a 2 per cent wealth tax on net assets worth more than £10 million.
Even Financial Times columnists and Tory grandee Ken Clarke have also called for higher taxes.
Opposition to a wealth tax comes from those who believe any tax increase is a bad thing. They often cite the Laffer curve, an influential graph written on a napkin in 1974 by the eponymous economist suggesting that if tax rose above a certain point revenue would actually fall, because of the disincentive to work and growing tax avoidance and evasion. But Laffer curve advocates sometimes struggle to show where that point is, or to accept that a government might not have reached it yet, meaning there’s still scope for revenue to rise.
But there is less ideological criticism of a wealth tax too, from those who say it would be too hard to implement.
Paul Johnson of the Institute of Fiscal Studies believes no country that’s tried has succeeded in raising serious money.
He told The Independent: “A lot of that money comes from the super-wealthy who can afford very good lawyers. And the question is, how do you determine their residence, where their assets sit – how would you value things?”
On the left, tax expert Richard Murphy, a former economic adviser to Jeremy Corbyn, agrees there are some “almost insurmountable problems inherent” in a wealth tax.
He says it’s not easy to find out what the wealthy own and then value it, whether it’s a racehorse or a piece of art. And then you have to start the process over again because it’s an annual tax.
Tax Justice UK believes it can answer these concerns. It says setting a high threshold of £10 million in wealth would only affect 0.04 per cent of the population – approximately 20,000 people – making it “vastly easier” to administer.
It says Spain’s net wealth tax implemented in 2011, far from being unsuccessful, has led to an increase in the number of taxpayers and the amount of revenue collected. And it calls some reports that Norway’s rich are fleeing the country because of an increase in wealth taxes “misleading and hyperbolic”.
While over in France they are heading towards implementing a tax on the super-rich to fund increased defence spending.
What does a wealth tax actually do?
Patriotic Millionaires UK and Tax Justice’s policy recommendation is for a wealth tax of 1-2 per cent on assets over £10 million, which they say would raise up to £24 billion a year.
They point to research from the Joseph Rowntree Foundation showing that in 2021 the top 10 per cent of the UK’s population owned 57 per cent of the country’s wealth, while the bottom 50 per cent owned less than 5 per cent.
They say the UK’s unequal tax system is “stacked in favour of the super-rich, fuelling this inequality”.
What the left is saying
“Now is an unbelievable opportunity to change the way the rich are taxed, and to introduce a wealth tax.” Gary Stevenson, City trader turned author and activist
“We need a complete re-set. Introducing a wealth tax could have been one way of beginning to deliver.” Apsana Begum, independent MP for Poplar and Limehouse
What the right is saying
“The Chancellor is right to cut spending rather than raise taxes again, and the cuts she has made are welcome.” Tom Clougherty, executive director of the Institute of Economic Affairs
“Let us keep the wealth creators in our country. Let us praise the work they do, the jobs they create and the contribution they make to our overall wealth as a nation. Let us not deter them and drive them away elsewhere.” Sir Christopher Chope, Conservative MP for Christchurch
What happens next?
All eyes will be on Reeves’s Budget in the autumn, when many experts predict she will need to announce tax increases. Despite that – and the growing support for it – a wealth tax looks too radical for her. Murphy and Tax Justice UK have put forward other proposals too, such as increasing income tax and equalising capital gains tax and income tax, which is higher. Even they look a step too far for this government but closing loopholes in business tax relief, inheritance tax and elsewhere may be necessary.
About The Lead Untangles: In an era where misinformation is actively and deliberately used by elected politicians and where advocates and opposers of beliefs state their point of view as fact, sometimes the most useful tool reporters have is to help readers make sense of the world.
The Lead Untangles is delivered each Friday by The Lead and focuses on a different complex, divisive issue with each edition.
About the author: Kevin Gopal is a Manchester-based journalist who has returned to freelancing after editing Big Issue North from 2007 until its closure in 2023. Prior to that he was assistant editor of Chinese community magazine SiYu, international editor of Pharmaceutical Executive, and deputy editor of North West Business Insider before freelancing widely on business, politics and policy for a number of titles. He is a leader in residence in journalism at the University of Central Lancashire.